American Depositary Receipts and the Foreign Corrupt Practices Act explained

American Depositary Receipts: the concept

In this era of global economic integration, the United States capital markets are an important source of financing for non-U.S. companies. One of the key ways that a non-U.S. firm might access U.S. capital is to deposit American Depositary Shares (ADS) with a U.S. issuer or sponsor, typically a bank. ADSs are U.S. dollar-denominated securities representing ownership in a non-U.S. company’s shares.

U.S. banks will then offer American Depository Receipts (ADRs) to the public. ADRs are physical certificates evidencing ownership interest in the non-U.S. firm’s ADSs in much the same way that stock certificates evidence shares of stock.[i]  Depending upon the extent to which the non-U.S. company is willing to adhere to U.S. securities and accounting rules, the ADRs may be traded over-the-counter or on national exchanges, such as the New York Stock Exchange or NASDAQ.

ADRs, first introduced in 1927, eliminate the complexities inherent in buying shares in foreign countries and in trading at different prices and currency values, making it easier for U.S. investors to invest in non-U.S. companies and for non-U.S. companies to access U.S. capital markets.

ADRs and the Foreign Corrupt Practices Act

From a purely economic standpoint, issuing ADRs generally makes sense.  However, it is important to consider how it might affect your company’s exposure to the U.S. legal system, especially in light of the Foreign Corrupt Practices Act (FCPA), which prohibits bribery of foreign officials.  The FCPA is a far-reaching statute that applies to conduct both inside and outside of the U.S.

Notwithstanding the FCPA’s broad geographic reach, U.S. courts must still find that a non-U.S. defendant (whether a company or an individual) has sufficient “minimum contacts” with the United States to be subject to their jurisdiction.

The fact that a non-U.S. company has issued ADRs in the U.S. alone is probably insufficient to subject that company or its non-U.S. personnel to the general jurisdiction of U.S. courts.[ii]  However, recent federal court decisions suggest that ADRs can form an important element in the exercise of personal jurisdiction in FCPA actions.

For example, in 2013, the U.S. District Court for the Southern District of New York determined that three non-U.S. executives of a Hungarian telecommunications company were subject to jurisdiction in New York based on their alleged role in the bribery of Macedonian government officials.[iii]  The underlying bribery activity occurred exclusively overseas and the three executives had no obvious ties to the U.S.  However, the company issued ADRs in the U.S.  According to the government, the executives had falsely certified financial statements to cover up the bribe payments.  The court held that the defendants were subject to jurisdiction in New York because they knew or should have known that U.S. purchasers of the company’s ADRs might rely upon those falsified financial statements.

ADRs may serve as a necessary, if not on their own sufficient, ingredient in the exercise of personal jurisdiction over non-U.S. defendants in FCPA actions.  ADRs, in essence, can serve as a conduit through which overseas activities (i.e., bribery of foreign officials and subsequent cover-up) are deemed to be directed at the U.S. (i.e., U.S. investors), allowing a court to find sufficient “minimum contacts” to exercise jurisdiction.

What this means for your company and personnel

FCPA violations carry stiff penalties.  On paper, organizational defendants can face up to $2 million in statutory fines, but in practice the amount is often much higher.  Because of the government’s ability to seek a fine equal to twice the monetary gain allegedly derived from a corporate bribe under the Alternative Fines Act, [iv] in recent years the government has collected multiple fines in the hundreds of millions of dollars.  What’s more, the government has aggressively targeted foreign companies, with eight of the top-ten FCPA corporate fines of all time levied against non-U.S. companies.

Individuals based outside of the U.S. convicted of violating the FCPA’s anti-bribery provisions can face up to five years in prison and/or $100,000 in fines,[v] which may not be paid directly or indirectly by the person’s firm.[vi]

The upshot is not that non-U.S. companies should avoid issuing ADRs, but they must be aware of unintended consequences.  It is crucial that companies issuing ADRs in the U.S. provide their non-U.S. personnel with robust FCPA-compliance training, as those ADRs could be the lynchpin of a U.S. court’s exercise of jurisdiction.


[i] Market participants typically refer to ADSs and ADRs interchangeably as ADRs, so I will refer to them collectively as ADRs from this point forward.

[ii] See, e.g., Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88, 97 (2d Cir. 2000) (“it is not that activities necessary to maintain a stock exchange listing do not count, but rather that, without more, they are insufficient to confer jurisdiction”); Estate of Unger v. Palestinian Authority, 400 F. Supp. 2d 541, 549-50 (S.D.N.Y. 2005) (Egyptian corporation’s placement of its own securities with the Bank of New York and sale of ADRs insufficient to subject it to general jurisdiction in New York).

[iii] See SEC v. Straub, 921 F. Supp. 2d 244 (S.D.N.Y. 2013).

[iv] 18 U.S.C. § 3571(c)(2) & (d).

[v] 15 U.S.C. §§ 78dd-2(g)(2)(A), 78dd-3(e)(2)(A), 78ff(c)(2)(A).

[vi] Id. §§ 78dd-2(g)(3), 78dd-3(e)(3), 78ff(c)(3).